Trean Insurance Group, Inc.

are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Garrett Edson of ICR. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Treon Insurance Group's fourth quarter and full year 2020 earnings call. This afternoon, the company released its financial results for the quarter and full year ended December 31st, 2020. The press release is available in the investor relations section of the company's website at www.treon.com. I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and the factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Andrew O'Brien, the company's President and Chief Executive Officer, and Julie Barron, the company's Chief Financial Officer. With that, I am now going to turn the call over to Andy.

Thank you, Garrett. We welcome you all to our fourth quarter 2020 earnings call. We appreciate your participation on our call and for your continued interest in Treon. On today's call, I will walk through our higher-level results and our overall strategy for 2021 and beyond. Our CFO, Julie Barron, will follow and provide some detail about our fourth quarter and four-year results, and then we'll open it up to Q&A. 2020 was a year that truly tested all of us, and I'm proud to say that our entire team at Treon faced the challenges head-on and delivered rock-solid results throughout the year. In July, we completed our initial public offering, a landmark achievement for our company. Further, the resilience of our business model was validated. and we enter 2021 in prime position to further expand our market share and sustainably grow our business. In particular, we were very pleased by our fourth quarter performance. We drove considerable revenue volume, revenue growth, which streamed to our cash flow and ultimately will increase our earnings. During the fourth quarter, we grew gross written premiums by 37% year over year, an excellent performance generated through multiple sources, including our new program partners, organic growth, and acquisition of 7710 insurance. Our net earned premium ratio is 30.2%. We continue to improve our loss ratio on a year-over-year basis, further evidence of our successful approach to underwriting. And we generated adjusted net income after excluding non-recurring other expenses and significant non-cash items of $11.2 million, or 22 cents per diluted share, producing adjusted ROE of 11% and adjusted ROTE of 23.4%. We've consistently discussed that a vital part of our overall program partner strategy is targeting specific niche programs with a clear competitive edge. To that end, in the fourth quarter, Our non-workers' comp liability lines grew gross written premiums by 75% year over year, while our workers' compensation segments saw a 28% increase. While workers' comp still makes up the lion's share of our business, we are making strong inroads in diversifying our overall business, which will serve to reduce concentration risk and enable us to exploit our advantages in newer niche segments to grow more rapidly. We also continue to maintain a strong pipeline of opportunities to add new business in the coming quarters. The fourth quarter was very strong for us in terms of year-over-year gross written premiums growth. And as we continue to retain more and more premium in our books, thanks to our solid capital base, we've also seen numerous additional opportunities to further expand our market share. During 2020, we added nine new program partners all of which are already making strong contributions to TRIA. Our growth in the second half of 2020 exceeded our projections, and we expect that momentum to carry into 2021. To responsibly build on this momentum, we plan to accelerate our investments in automation, technology, workforce additions, and other areas in order to ensure that we are providing a superior competitive and value proposition to existing and prospective customers. While these investments in our growth will cause G&A to remain somewhat elevated in 2021, we know these targeted investments will help ensure sustainable and profitable growth for Trion and is ultimately the right path forward to create additional long-term value. As we sit here in March and judging by our fourth quarter and overall 2020 performance, we remain very well positioned to succeed and significantly grow our gross written premium through 2021. We will continue to pursue organic growth within our existing markets to further increase our gross written premium. And it's clearly evident we've made significant progress in retaining more quality net earned premium, which should further enhance our bottom line going forward. With a robust balance sheet, we are confident that we can successfully execute on our growth strategies. Our business model and operating strategy is exceedingly resilient and powerful, and we are excited for what entails for 2021 and beyond. We remain focused on supporting our existing program partners, responsibly accepting new opportunities, seeking proper rate levels, and quickly and fairly resolving claims. I'm proud of our entire team for their continued efforts and dedication. And with that, I'll now turn the call over to our CFO, Julie Barrett. Julie?

Thank you, Andy, and good afternoon to everyone on the call. Let's go right into our fourth quarter results. In the fourth quarter, our team grew gross written premiums by 37%, so $134.5 million, compared to $97.9 million in the prior year period. This growth was driven by the addition of nine new program partners throughout 2020, organic growth, as well as the acquisition of 7710 Insurance Company at the beginning of the fourth quarter, and resulted in an increase in both workers' compensation and non-workers' compensation liability lines of business. We are proud of our gross written premiums performance and are positioned strongly for continued growth in 2021. Gross written premiums were $121.9 million for the fourth quarter of 2020, up 19% compared to the prior year period. Due primarily to the increase in gross written premiums, and partially offset by the increase in gross unearned premiums due to the addition of new program partners during 2020 whose premiums were largely unearned as of the end of the fourth quarter. As a reminder, since we cannot control the timing of effective dates of new policies, this lag effect is a fairly common occurrence when we onboard new program partners. Thus, we continue to recommend that the focus be on gross written premiums as the best proxy for the growth of our business. Further, as we noted in our last call, One quarter's performance is difficult to utilize as a run rate for the next quarter, as premiums often come in uneven blocks. That said, we remain confident in our ability to onboard additional new program partners and sustainably grow our gross return premiums over the long term. Net earned premiums for the fourth quarter were $36.8 million, an increase of 73% compared to $21.3 million in the prior year period, primarily due to the increase in gross earned premiums more than offsetting a smaller increase in seeded earned premiums. Our net earned premium to gross earned premium ratio was 30.2% in the fourth quarter of 2020, a 940 basis point improvement from 20.8% in the prior year period. With our robust balance sheet, we expect to continue retaining more premium over time and grow net earned premiums commensurately. Our loss ratio for the fourth quarter of 2020 is 27.4%, a 180 basis point improvement compared to 29.2% in the prior year period. Loss activity during the fourth quarter of 2020 was directly attributable to the increase in earned premium and partially offset by lower favorable loss reserve estimate true-ups made for the fourth quarter of 2020 than for the prior year period. We typically record a lower loss ratio in the fourth quarter compared to the first through third quarters, and thus we would expect the loss ratio to return to a more normalized figure in the first quarter of 2021. G&A expense was $15.2 million in the fourth quarter of 2020 compared to $5.1 million in the prior year quarter. Included in G&A expense for the fourth quarter of 2020 was approximately $5.2 million of various accrual true-ups related to profit sharing, seating commissions, and deferred acquisition costs. The remainder of the increase was primarily due to higher net agent commissions resulting from the company's increased retention, increased insurance, and professional service expenses, as well as higher expenses associated with an expanded workforce from acquisitions and continued investments. As Andy noted, given the significant momentum we are seeing in our business, we are going to invest throughout the year in our business, technology, and our workforce in order to enhance our competitive position and take advantage of opportunities we are seeing in the marketplace. As a result, we expect G&A expenses will continue to remain elevated in 2021 compared to a prior year period. All in, our combined ratio for the fourth quarter of 2020 was 68.8% compared to 53% in the prior year period. Excluding the accrual true-up G&A charges I just mentioned, our combined ratio for the fourth quarter of 2020 would have been 54.6%. Underwriting income for the fourth quarter was $11.4 million, a 14% increase compared to $10 million in the prior year period. Net investment income for the fourth quarter of 2020 was $1.7 million, comparable with the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities at $405.6 million at December 31, 2020, classified as available for sale. We also had $153.1 million of cash and cash equivalents. Our investment portfolio had an average rating of AA at the end of the quarter. Other revenue, which consists primarily of third-party administrator and brokerage fees, was $0.8 million for the quarter due to reduced brokerage fees due to the changes in estimated premiums on reinsurance contracts. Gap net income for the fourth quarter of 2020 was $8.1 million, or $0.16 diluted earnings per share. When excluding non-recurring other expenses, non-cash stock compensation, and intangible asset amortization, adjusted net income for the fourth quarter of 2020 was $11.2 million compared to $11.4 million in the prior year period. Adjusted diluted earnings per share for the fourth quarter of 2020 was $0.22. ROE for the fourth quarter was 8%, while adjusted ROE was 11%. Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity, was 23.4%. For the full year 2020, gross return premiums grew 18% to $484.2 million, driven by the addition of new program partners throughout 2020, organic growth, as well as the acquisition of 7710 Insurance Company. Total underwriting income for 2020 was $19 million compared to $20.9 million in the prior year, while adjusted net income for 2020 was $32.8 million, relatively comparable to the prior year, despite the additional expenses incurred from being a public company in July 2020. It was a very successful 2020 for Trion in the midst of an incredibly challenging environment, and we believe we are positioned strongly to grow rapidly and responsibly in 2021 and for the long term. With that, I thank you for your time and will now open up the call for Q&A. Operator?

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys One moment while we poll for questions. Our first question comes from the line of Matt Carletti with GMP Security. You may proceed with your question.

Hey, thanks. Good afternoon. My first question probably for you, Julie.

Hey, how are you? Could you pick apart the loss ratio a little bit and specifically just looking for the dollar amount of prior year development in the quarter? And then secondarily, could you talk a little bit about, I know in prior quarters you had talked about, you know, a frequency benefit that you had been seeing likely COVID-related, but you hadn't recognized it. You know, is there a way to kind of get a feel for how much of that you might have recognized, you know, with the Q4 results versus any you might have held on to to see how it plays out going forward?

Okay. So, we had several loss reserve releases in prior years of about a little over 14 million, 14.8 million.

Wonderful.

And then, you know, can you update us on just the kind of frequency trends you're seeing and, you know, if anything changed in Q4, both from what you're observing versus what you might have recognized that you had it in prior quarters?

Matt, nothing specific stands out right now. We did see a number of COVID claims filed in California as a result of the presumption statute. Many of those claims have been resolved with little or no payment. Overall frequency... at the end of the year, accounting the COVID claims, seem to be similar to what we experienced in previous years.

Okay, great.

And then maybe, Andy, if I could just ask you about the workers' comp environment more broadly, what you're seeing in terms of competition, pricing, things like that.

Knowing California is a big piece of your book.

Sure. Over all of our business, we still have not seen any significant rate increases. really anywhere. We haven't seen much in the way of rate deterioration, though. So I would say, over our business, it feels like the rate levels this year are very similar to the rate levels next year. There's still a lot of competitors in the market. We haven't seen a lot of new entrants where we are participating. California has been a little bit more challenging this year. The rate levels in California have not moved in a direction that we would have wished they would have moved in.

Fair enough.

And then lastly, if I could ask you to kind of clarify, I think both Andy and Julie, both of you had comments about investing in the business, you know, for going forward and how we should think about the expenses in 21. If we look at the expense ratio kind of for the full year for 20, is that sort of level a reasonable level to think about 21, even given the growth? Or if you could help us frame that a little bit, it would be helpful. Thank you.

Yeah, Matt, let me start with a more general statement. We exceeded our 2020 growth objectives, and we are optimistic about our 2021 growth opportunities. To take advantage of these opportunities, we do plan to accelerate some investments in new people and automation. Remember, there's a lag between the time we recognize expenses and when we can record profits. So our expense ratio will be higher in times of elevated growth. We actually believe that the growth in our interim premium is probably a good measure of the deferred profit we are building as we are growing our company and incurring our upfront expenses.

All right, great. Thank you.

Congrats on the very nice end of the year and good luck in 21.

Great.

Thanks, man.

Our next question comes from the line of Jimmy Buller with JP Morgan. You may proceed with your questions.

Hi. First, a question on just your premium growth. Can you discuss, you mentioned non-workers comp growing at a fast rate. What lines you're growing in and what your outlook is in terms of like how these lines will contribute to your growth in 2021 outside of workers comp?

Hi, Jimmy. We did grow significantly from a percentage basis in lines outside of workers comp. We are seeing rate increases in other lines that are outstripping what we're seeing in workers' comp. Where we have seen some improvements are really across a variety of lines. Commercial auto homeowners and medical stop loss are three lines that grew pretty appreciably for us in the second half of 2020, and we anticipate that the momentum that began in those lines last year, will be continuing this year.

Yeah, and to put some numbers on it, Jimmy.

Go on, sorry.

I was just going to add just some numbers. Work comp growth in the fourth quarter was 28% over prior year period, and the other lines of business grew about 75% compared to the same period last year. And again, as Andy mentioned, most of that was commercial auto, homeowners, and stop loss.

Okay.

And in terms of the expense ratio, can you quantify how much you expect expenses to be elevated versus the last few quarters? And just to give us an idea on how the core expense ratio is trending versus some of the investments you're making and how much are they going to sort of pick up the expense ratio this year? Sure.

You know, Jimmy, we're really not wanting to provide any guidance around the expense ratio. We know that it's going to be elevated because of the investments that we're making due to our growth, and we feel like we really have to do that to service our programs and the business in the manner that we've always done that.

Okay, that's all I have. Thank you.

Thank you. Our next question comes from the line of David Modamadam with Epicor ISI. You may proceed with your question.

Hi. Good afternoon. Andy, I was hoping maybe you could talk a bit about, you know, the deal pipeline not only for M&A but also for, you know, potential program partners. Been hearing a lot that the pandemic has maybe pushed more smaller businesses that are right in your wheelhouse to consider partnering with larger organizations such as yourself. Have you seen a meaningful pickup in this? And I guess just maybe talk about how big of an opportunity this is. and your pipeline and, you know, was an increase in your pipeline and sort of what you guys are seeing really a big driver behind the increased investments that you guys are going to make to support, I guess, the growth on the horizon?

Yeah, you know, Dave, we did exceed our expectations in both the third and fourth quarter last year. And that's really on the backs of, I mean, we always expected that our growth would come primarily in the second half of the year, but we certainly did not expect the number of opportunities that would be presented to us. It has been at a very high level all of the last half of the year, and it is continuing. It is continuing. As I mentioned earlier, we're just very optimistic about our 2021 growth opportunities. We don't want to provide guidance about where we think it's going to be, but I can tell you that we think that there are many attractive opportunities and they do not seem to be slow enough.

Got it. So I guess you're would you say you're similarly, like, are you more confident about growth organically or inorganically? I guess, could you comment on just what avenue you feel best about going forward?

Good question. And, you know, when you look at the new programs that we've put on in the fourth quarter, and some of these programs are just starting now to produce. And so I guess we could talk about, is that organic growth? Because they're already on a program where they're part of the new programs. I I think organic growth is not going to be as high as the growth we are getting from new partners. I think that's what we're going to see. And of course, one new program can make a big difference for us. So we're excited by that.

Got it. Okay. That's helpful. And then I...

I just wanted to ask just on the retention levels, um, you know, that's, I think it's the second quarter in a row where you guys have, have retained a bit more than, than what I had thought. Um, I guess, you know, I guess, are, are, are you guys thinking, you know, as you guys retain more business, are you, are you thinking you'll reach up to 40% retention in 2021? Or is that something, um, you know, something more of like a 2022 event, just sort of thinking about, you know, how much business you guys are comfortably keeping on your own balance sheet?

You know, again, we don't want to provide guidance, but, you know, we did increase our retention on a couple of programs last year. And, you know, that takes time. It doesn't happen, you know, on the day the contract is signed. It happens over time as the premiums are earned out. when you see it flow through the income statement. So it will, you know, it takes a full year before you see the full impact of that increased retention, you know, at that earned premium level. But we, you know, we are increasing our retention. And so it, but again, that's offset by adding new programs where we're retaining anywhere from zero to 10% only. So it's really going to depend on the mix.

Dave, our business philosophy is to be very conservative in terms of retained risk on our new programs. And as Julie just alluded, we're keeping in the aggregate over these new programs something like just 6% net risk. And as those programs, so we're keeping a lot more on our established programs to the degree that our new programs continue to produce as they did in the last two quarters, that will drive down our overall retained percentage, even though our percentage on our existing business, where we think it's more proven, is increasing.

Right. Right, that makes sense. And just to refresh my memory, are you guys at fully 100% retained on CompStar?

No, we are not.

Okay. Is that something you guys think you'll get to within the next year?

I don't think so. I don't think so.

Okay. Okay. That's fair. And I, I, I think the philosophy that you guys are following, uh, it, you know, it makes sense, uh, from a, from a discipline risk management discipline standpoint. Um, I guess if I could just sneak one more in, this is probably for Julie. I think you said it was, what, 14.8 million of favorable reserve releases. Could you maybe help me with what accident years those primarily came from?

I don't have that off the top of my head, David. I would have to pull off the Schedule P's and look at those. I would say the majority of it was in the 19 to 15 years.

Got it. Okay.

Thank you. I think it spread pretty evenly over those years.

Got it. Understood. Thank you.

Our next question comes from the line of Adam Claver with William Blair. You may proceed with your question.

Thanks. A couple questions, just to follow up on the growth. Could you give us a rough idea on the contribution of organic versus new partners versus the acquisition?

A lot of the new growth, Adam, is coming from the new partners. The organic growth... Yeah, yeah, yeah.

We grew growth rate and premium in the fourth quarter about 37%. About a third of that growth was from our existing program, and two-thirds of that was from our new business.

Okay. Okay, that's very helpful. And then, you know, just roughly, for the fourth quarter, what was the percent of business that was non-comp versus maybe the fourth quarter of last year?

I have the growth number on.

Adam, we have that number somewhere, but can we get back to you with that?

Okay, yeah.

Yeah, sure, sure.

And also, you know, with the non-comp growth, is that coming both from the new partners and existing partners, or is it more skewed towards the newer partners coming on?

It's mostly the new partners. We've seen a number of... very attractive programs last year that we put on outside of work comp, and they're performing consistent with our expectations right now.

Okay. Okay. And along that line, and I think how you run the business, typically new programs, you know, you take lower retention. So I would assume that because some of these are, you know, the non-comp are – you know, newer programs, you probably have lower retention than that in your average book. Is that, you know, ballpark a fair assessment?

Absolutely a fair statement, yes.

Okay, okay, that's helpful. And then on expenses, and, you know, totally understand that I'm not giving guidance at this point. You know, can we think about the, you know, sort of a, I guess, a base level? So excluding the accruals, your G&A was roughly $10 million in the fourth quarter. And you said you may elevate from there, but is that a reasonable base we can think about, sort of that 10 million?

I think that would be giving guidance if I answered that, so I will refrain.

Okay. Okay, that is fair enough.

You may have said, but how is your pipeline for new programs? I guess twofold. How is your pipeline in How's your ability to bring on new programs, given that you had a really strong year last year?

The opportunities that are being presented to us continue to be at an elevated rate. We did put on nine new programs last year. With the number of new programs that we have that are just developing, we don't need to put on a lot of new programs this year to make significant growth during the year.

Right, right. But is that – and clearly, I mean, you're showing, you know, much better growth than we had expected. But, you know, if you see some good programs, do you have the bandwidth right now or are you so busy with those? Because, I mean, nine programs is a lot compared to what you've historically done. You know, are you just sort of at capacity for getting these new programs up and running right now?

That's a great question, and I'll try and answer it in two parts. Yes, if a really good program came to us, we would have the bandwidth to add that program. But at some point, if we don't make some investments, we will find ourselves in a situation where a good program will come to us and we won't be able to take advantage of it. And that's exactly the situation we want to avoid. We just see a great opportunity here, and we want to make sure that we can handle it responsibly and that we've got the resources in place to do the job. And that's why we've made the decision that we're going to be making some investments in people and in automation efforts to make sure that we can always respond appropriately and quickly to a good program when it comes to us.

Okay, great. And then can you give us, I guess, some idea what those investments in automation would be? Are those new policy management systems, new claim systems? I guess what is generally what does that entail?

It could be all of the above. I mean, certainly we are working on a new claim system. And so that's something that we are working on now. we've identified a lot of low-hanging, our IT people have identified a lot of low-hanging fruit items where by just making a few IT changes, we can really automate a number of areas that are not as automated as we'd like them to be. I guess we're like every other insurance company that way. But, you know, we're feeling that we need to act now because of the growth. It's... It's been exciting.

Are you thinking about upgrading your policy management system also?

I don't think, well, you know what, that gets me into guidance, so I think I better. Sorry.

Yeah, I better. We'll take that off the table then. Okay. That's very helpful. Thanks, guys.

Great. Thanks, Adam. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Andy O'Brien for closing remarks.

Thank you. Our program partners and our TREON team performed exceptionally well during this really difficult past year. And so my thanks to them for their commitment and effort. We enjoyed strong growth and were optimistic about our future. Our loss ratios were stable. were executed on our proven historic plan. We thank you for your interest and support. Thank you.

This concludes today's program. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.

Thank you. Thank you. Thank you. Thank you. Bye.

Greetings and welcome to Treon Insurance Group Inc. 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Garrett Edson of ICR. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Treon Insurance Group's fourth quarter and full year 2020 earnings call. This afternoon, the company released its financial results for the quarter and full year ended December 31st, 2020. The press release is available in the investor relations section of the company's website at www.treon.com. I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Andrew O'Brien, the company's President and Chief Executive Officer, and Julie Barron, the company's chief financial officer. With that, I am now going to turn the call over to Andy.

Thank you, Garrett. We welcome you all to our fourth quarter 2020 earnings call. We appreciate your participation on our call and for your continued interest in Trion. On today's call, I will walk through our higher level results and our overall strategy for 2021 and beyond. Our CFO, Julie Barron, will follow and provide some detail about our fourth quarter and four-year results, and then we'll open it up to Q&A. 2020 was a year that truly tested all of us, and I'm proud to say that our entire team at Treon faced the challenges head-on and delivered rock-solid results throughout the year. In July, we completed our initial public offering, a landmark achievement for our company. Further, the resilience of our business model was validated. and we entered 2021 in prime position to further expand our market share and sustainably grow our business. In particular, we were very pleased by our fourth quarter performance. We drove considerable revenue volume, revenue growth, which streamed to our cash flow and ultimately will increase our earnings. During the fourth quarter, we grew gross written premiums by 37% year over year, an excellent performance generated through multiple sources, including our new program partners, organic growth, and acquisition of 7710 insurance. Our net earned premium ratio is 30.2%. We continue to improve our loss ratio on a year-over-year basis, further evidence of our successful approach to underwriting. And we generated adjusted net income after excluding non-recurring other expenses and significant non-cash items of $11.2 million, or 22 cents per diluted share, producing adjusted ROE of 11% and adjusted ROTE of 23.4%. We've consistently discussed that a vital part of our overall program partner strategy is targeting specific niche programs with a clear competitive edge. To that end, in the fourth quarter, Our non-workers' comp liability lines grew gross written premiums by 75% year over year, while our workers' compensation segments saw a 28% increase. While workers' comp still makes up the lion's share of our business, we are making strong inroads in diversifying our overall business, which will serve to reduce concentration risk and enable us to exploit our advantages in newer niche segments to grow more rapidly. We also continue to maintain a strong pipeline of opportunities to add new business in the coming quarters. The fourth quarter was very strong for us in terms of year-over-year gross written premiums growth. And as we continue to retain more and more premium in our books, thanks to our solid capital base, we've also seen numerous additional opportunities to further expand our market share. During 2020, we added nine new program partners all of which are already making strong contributions to Treon. Our growth in the second half of 2020 exceeded our projections, and we expect that momentum to carry into 2021. To responsibly build on this momentum, we plan to accelerate our investments in automation, technology, workforce additions, and other areas in order to ensure that we are providing a superior competitive and value proposition to existing and prospective customers. While these investments in our growth will cause G&A to remain somewhat elevated in 2021, we know these targeted investments will help ensure sustainable and profitable growth for Trion and is ultimately the right path forward to create additional long-term value. As we sit here in March and judging by our fourth quarter and overall 2020 performance, we remain very well positioned to succeed and significantly grow our gross written premium through 2021. We will continue to pursue organic growth within our existing markets to further increase our gross written premium. And it's clearly evident we've made significant progress in retaining more quality net earned premium, which should further enhance our bottom line going forward. With a robust balance sheet, we are confident that we can successfully execute on our growth strategies. Our business model and operating strategy is exceedingly resilient and powerful, and we are excited for what entails for 2021 and beyond. We remain focused on supporting our existing program partners, responsibly accepting new opportunities, seeking proper rate levels, and quickly and fairly resolving claims. I'm proud of our entire team for their continued efforts and dedication. And with that, I'll now turn the call over to our CFO, Julie Barrett. Julie?

Thank you, Andy, and good afternoon to everyone on the call. Let's go right into our fourth quarter results. In the fourth quarter, our team grew gross written premiums by 37%, so $134.5 million, compared to $97.9 million in the prior year period. This growth was driven by the addition of nine new program partners throughout 2020, organic growth, as well as the acquisition of 7710 Insurance Company at the beginning of the fourth quarter, and resulted in an increase in both workers' compensation and non-workers' compensation liability lines of business. We are proud of our gross written premiums performance and are positioned strongly for continued growth in 2021. Gross written premiums were $121.9 million for the fourth quarter of 2020, up 19% compared to the prior year period. Due primarily to the increase in gross written premiums, and partially offset by the increase in gross unearned premiums due to the addition of new program partners during 2020 whose premiums were largely unearned as of the end of the fourth quarter. As a reminder, since we cannot control the timing of effective dates of new policies, this lag effect is a fairly common occurrence when we onboard new program partners. Thus, we continue to recommend that the focus be on gross written premiums as the best proxy for the growth of our business. Further, as we noted in our last call, One quarter's performance is difficult to utilize as a run rate for the next quarter, as premiums often come in uneven blocks. That said, we remain confident in our ability to onboard additional new program partners and sustainably grow or grow certain premiums over the long term. Net earned premiums for the fourth quarter were $36.8 million, an increase of 73% compared to $21.3 million in the prior year period, primarily due to the increase in gross earned premiums more than offsetting a smaller increase in seeded earned premiums. Our net earned premium to gross earned premium ratio was 30.2% in the fourth quarter of 2020, a 940 basis point improvement from 20.8% in the prior year period. With our robust balance sheet, we expect to continue retaining more premium over time and grow net earned premiums commensurately. Our loss ratio for the fourth quarter of 2020 is 27.4%, a 180 basis point improvement compared to 29.2% in the prior year period. Loss activity during the fourth quarter of 2020 was directly attributable to the increase in earned premium and partially offset by lower favorable loss reserve estimate true-ups made for the fourth quarter of 2020 than for the prior year period. We typically record a lower loss ratio in the fourth quarter compared to the first through third quarters, and thus we would expect the loss ratio to return to a more normalized figure in the first quarter of 2021. G&A expense was $15.2 million in the fourth quarter of 2020 compared to $5.1 million in the prior year quarter. Included in G&A expense for the fourth quarter of 2020 was approximately $5.2 million of various accrual true-ups related to profit sharing, seating commissions, and deferred acquisition costs. The remainder of the increase was primarily due to higher net agent commissions resulting from the company's increased retention, increased insurance, and professional service expenses, as well as higher expenses associated with an expanded workforce from acquisitions and continued investments. As Andy noted, given the significant momentum we are seeing in our business, we are going to invest throughout the year in our business, technology, and our workforce in order to enhance our competitive position and take advantage of opportunities we are seeing in the marketplace. As a result, we expect G&A expenses will continue to remain elevated in 2021 compared to a prior year period. All in, our combined ratio for the fourth quarter of 2020 was 68.8% compared to 53% in the prior year period. Excluding the accrual true-up G&A charges I just mentioned, our combined ratio for the fourth quarter of 2020 would have been 54.6%. Underwriting income for the fourth quarter was $11.4 million, a 14% increase compared to $10 million in the prior year period. Net investment income for the fourth quarter of 2020 was $1.7 million, comparable with the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities at $405.6 million at December 31, 2020, classified as available for sale. We also had $153.1 million of cash and cash equivalents. Our investment portfolio had an average rating of AA at the end of the quarter. Other revenue, which consists primarily of third-party administrator and brokerage fees, was $0.8 million for the quarter due to reduced brokerage fees due to the changes in estimated premiums on reinsurance contracts. Gap net income for the fourth quarter of 2020 was $8.1 million, or $0.16 diluted earnings per share. When excluding non-recurring other expenses, non-cash stock compensation, and intangible asset amortization, adjusted net income for the fourth quarter of 2020 was $11.2 million compared to $11.4 million in the prior year period. Adjusted diluted earnings per share for the fourth quarter of 2020 was $0.22. ROE for the fourth quarter was 8%, while adjusted ROE was 11%. Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity, was 23.4%. For the full year 2020, gross return premiums grew 18% to $484.2 million, driven by the addition of new program partners throughout 2020, organic growth, as well as the acquisition of 7710 Insurance Company. Total underwriting income for 2020 with $19 million compared to $20.9 million in the prior year, while adjusted net income for 2020 was $32.8 million, relatively comparable to the prior year, despite the additional expenses incurred from being a public company in July 2020. It was a very successful 2020 for Trion in the midst of an incredibly challenging environment, and we believe we are positioned strongly to grow rapidly and responsibly in 2021 and for the long term. With that, I thank you for your time and will now open up the call for Q&A. Operator?

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys One moment while we poll for questions. Our first question comes from the line of Matt Carletti with GMP Security. You may proceed with your question.

Hey, thanks. Good afternoon. My first question probably for you, Julie.

Hey, how are you? Could you pick apart the loss ratio a little bit and specifically just looking for the dollar amount of prior year development in the quarter? And then secondarily, could you talk a little bit about, I know in prior quarters you had talked about, you know, a frequency benefit that you had been seeing likely COVID-related, but you hadn't recognized it. You know, is there a way to kind of get a feel for how much of that you might have recognized, you know, with the Q4 results versus any you might have held on to to see how it plays out going forward?

Okay. So we had several loss reserve releases in prior years of about a little over 14 million, 14.8 million.

Wonderful.

And then, you know, can you update us on the kind of frequency trends you're seeing and, you know, anything changing before both from what you're observing specifically versus what you might have recognized that you had it in prior quarters?

Matt, nothing specific stands out right now. We did see a number of COVID claims filed in California as a result of the presumption statute. Many of those claims have been resolved with little or no payment. Overall frequency... At the end of the year, it seems, according to COVID claims, seem to be similar to what we experienced in previous years.

Okay, great.

And then maybe, Andy, if I could just ask you about the workers' comp environment more broadly, what you're seeing in terms of competition, pricing, things like that.

Knowing California is a big piece of your book.

Sure. Over all of our business, we still have not seen any significant rate increases. really anywhere. We haven't seen much in the way of rate deterioration, though. So I would say over our business, it feels like the rate levels this year are very similar to the rate levels next year. There's still a lot of competitors in the market. We haven't seen a lot of new entrants where we are participating. California has been a little bit more challenging this year. The rate levels in California have not moved in a direction that we would have wished they would have moved in.

Fair enough.

And then lastly, if I could ask you to kind of clarify, I think both Andy and Julie, both of you had comments about investing in the business, you know, for going forward and how we should think about the expenses in 21. If we look at the expense ratio kind of for the full year for 20, is that sort of level a reasonable level to think about 21, even given the growth? Or if you could help us frame that a little bit, it would be helpful. Thank you.

Yeah, Matt, let me start with a more general statement. We exceeded our 2020 growth objectives, and we are optimistic about our 2021 growth opportunities. To take advantage of these opportunities, we do plan to accelerate some investments in new people and automation. Remember, there's a lag between the time we recognize expenses and when we can record profits. So our expense ratio will be higher in times of elevated growth. We actually believe that the growth in our interim premium is probably a good measure of the deferred profit we are building as we are growing our company and incurring our upfront expenses.

All right, great. Thank you.

Congrats on the very nice end of the year, and good luck in 21.

Great.

Thanks, Matt.

Our next question comes from the line of Jimmy Buller with J.P. Morgan. You may proceed with your questions.

Hi. First, a question on just your premium growth. Can you discuss, you mentioned non-workers comp growing at a fast rate. What lines you're growing in and what your outlook is in terms of like how these lines will contribute to your growth in 2021 outside of workers comp?

Hi, Jimmy. We did grow significantly from a percentage basis in lines outside of workers comp. There are, we are seeing rate increases in other lines that are outstripping what we're seeing in workers' comp. Where we have seen some improvements are really across a variety of lines. Commercial auto homeowners and medical stop loss are three lines that grew pretty appreciably for us in the second half of 2020, and we anticipate that the momentum that began in those lines last year, will be continuing this year.

Yeah, and to put some numbers on it, Jimmy.

Go on, sorry.

I was just going to add just some numbers. Work comp growth in the fourth quarter was 28% over prior year period, and the other lines of business grew about 75% compared to the same period last year. And again, as Andy mentioned, most of that was commercial auto, homeowners, and stop loss.

Okay.

And in terms of the expense ratio, can you quantify how much you expect expenses to be elevated versus the last few quarters? And just to give us an idea on how the core expense ratio is trending versus some of the investments you're making and how much are they going to sort of pick up the expense ratio this year?

You know, Jimmy, we're really not wanting to provide any guidance around the expense ratio. We know that it's going to be elevated because of the investments that we're making due to our growth, and we feel like we really have to do that to service our programs and the business in the manner that we've always done that.

Okay, that's all I have. Thank you.

Thank you. Our next question comes from the line of David Modamadam with Evercore ISI. You may proceed with your question.

Hi. Good afternoon. Andy, I was hoping maybe you could talk a bit about, you know, the deal pipeline not only for M&A but also for, you know, potential program partners. Been hearing a lot that the pandemic has maybe pushed more smaller businesses that are right in your wheelhouse to consider partnering with larger organizations such as yourself. Have you seen a meaningful pickup in this? And I guess just maybe talk about how big of an opportunity this is. and your pipeline and, you know, was an increase in your pipeline and sort of what you guys are seeing really a big driver behind the increased investments that you guys are going to make to support, I guess, the growth on the horizon?

Yeah, you know, Dave, we did exceed our expectations in both the third and fourth quarter last year. And that's really on the back. I mean, we always expected that our growth would come primarily in the second half of the year, but we certainly did not expect the number of opportunities that would be presented to us. It has been at a very high level all of the last half of the year, and it is continuing. It is continuing. As I mentioned earlier, we're just very optimistic about our 2021 growth opportunities. We don't want to provide guidance about where we think it's going to be, but I can tell you that we think that there are many attractive opportunities and they do not seem to be slow enough.

Got it. So I guess you're would you say you're similarly, like, are you more confident about growth organically or inorganically? I guess, could you comment on just what avenue you feel best about going forward?

Good question. And, you know, when you look at the new programs that we've put on in the fourth quarter, and some of these programs are just starting now to produce. And so I guess we could talk about is that organic growth because they're already on a program or are they part of the new programs? I I think organic growth is not going to be as high as the growth we are getting from new partners. I think that's what we're going to see. And, of course, one new program can make a big difference for us. So we're excited by that.

Got it. Okay. That's helpful. And then I...

I just wanted to ask just on the retention levels, um, you know, that's, I think it's the second quarter in a row where you guys have, have retained a bit more than, than what I had thought. Um, I guess, you know, I guess, are, are, are you guys thinking, you know, as you guys retain more business, are you, are you thinking you'll reach up to 40% retention in 2021? Or is that something, um, you know, something more of like a 2022 event, just sort of thinking about, you know, how much business you guys are comfortably keeping on your own balance sheet?

You know, again, we don't want to provide guidance, but, you know, we did increase our retention on a couple of programs last year. And, you know, that takes time. It doesn't happen, you know, on the day the contract is signed. It happens over time as the premiums are earned out. when you see it flow through the income statement. So it takes a full year before you see the full impact of that increased retention at that earned premium level. But we are increasing our retention. But again, that's offset by adding new programs where we're retaining anywhere from 0% to 10% only. So it's really going to depend on the mix.

Dave, our business philosophy is to be very conservative in terms of retained risk on our new programs. And as Julie just alluded, we're keeping in the aggregate over these new programs something like just 6% net risk. And as those programs, so we're keeping a lot more on our established programs to the degree that our new programs continue to produce as they did in the last two quarters, that will drive down our overall retained percentage, even though our percentage on our existing business, where we think it's more proven, is increasing.

Right. Right, that makes sense. And just to refresh my memory, are you guys at fully 100% retained on CompStar?

No, we are not.

Okay. Is that something you guys think you'll get to within the next year?

I don't think so. I don't think so.

Okay. Okay. That's fair. And I think the philosophy that you guys are following, you know, it makes sense from a risk management discipline standpoint. I guess if I could just sneak one more in, this is probably for Julie. I think you said it was, what, 14.8 million of favorable reserve releases. Could you maybe help me with what accident years those primarily came from?

I don't have that off the top of my head, David. I would have to pull off the Schedule P's and look at those. I would say the majority of it was in the 19 to 15 years.

Got it. Okay.

Thank you. I think it spread pretty evenly over those years.

Got it. Understood. Thank you.

Our next question comes from the line of Adam Klauber with William Blair. You may proceed with your question.

Thanks. A couple questions, just to follow up on the growth. Could you give us a rough idea on the contribution of organic versus new partners versus the acquisition?

A lot of the new growth, Adam, is coming from the new partners. The organic growth... Yeah, yeah.

We grew growth rate and premium in the fourth quarter about 37%. About a third of that growth was from our existing program, and two-thirds of that was from our new business.

Okay. Okay, that's very helpful. And then, you know, just roughly for the fourth quarter, what was the percent of business that was non-comp versus maybe the fourth quarter of last year?

I have the growth number on.

Adam, we have that number somewhere, but can we get back to you with that?

Okay, yeah.

Yeah, sure, sure.

And also, you know, with the non-comp growth, is that coming both from the new partners and existing partners, or is it more skewed towards the newer partners coming on?

It's mostly the new partners. We've seen a number of... very attractive programs last year that we put on outside of work comp, and they are performing consistent with our expectations right now.

Okay. Okay. And along that line, and I think how you run the business, typically new programs, you know, you take lower retention, so I would assume that because some of these are, you know, the non-comp are... you know, newer programs, you probably have lower retention than that, than your average book. Is that, is that, you know, ballpark of fair assessment?

Absolutely a fair statement. Yes.

Okay. Okay. That's helpful. And then on expenses and, you know, totally understand that not given guidance at this point, you know, can we think about the, you know, sort of a, I guess a base level. So excluding their accruals, your GNA was roughly 10 million in the fourth quarter. And you said you may elevate from there, but is that a reasonable base we can think about, sort of that 10 million?

I think that would be giving guidance if I answered that, so I will refrain.

Okay.

Okay, that is fair.

You may have said, but how is your pipeline for new programs? I guess twofold. One, how is your pipeline in How's your ability to bring on new programs, given that you had a really strong year last year?

The opportunities that are being presented to us continue to be at an elevated rate. We did put on nine new programs last year. With the number of new programs that we have that are just developing, we don't need to put on a lot of new programs this year to make significant growth during the year.

Right, right. But is that – and clearly, I mean, you're showing, you know, much better growth than we had expected. But, you know, if you see some good programs, do you have the bandwidth right now or are you so busy with those? Because, I mean, nine programs is a lot compared to what you've historically done. You know, are you just sort of at capacity for getting these new programs up and running right now?

That's a great question, and I'll try and answer it in two parts. Yes, if a really good program came to us, we would have the bandwidth to add that program. But at some point, if we don't make some investments, we will find ourselves in a situation where a good program will come to us and we won't be able to take advantage of it. And that's exactly the situation we want to avoid. We just see a great opportunity here, and we want to make sure that we can handle it responsibly and that we've got the resources in place to do the job. And that's why we've made the decision that we're going to be making some investments in people and in automation efforts to make sure that we can always respond appropriately and quickly to a good program when it comes to us.

Okay, great. And then can you give us, I guess, some idea what those investments in automation would be? Are those new policy management systems, new claim systems? I guess what is generally what does that entail?

It could be all of the above. I mean, certainly we are working on a new claim system. And so that's something that we are working on now. we've identified a lot of low-hanging, our IT people have identified a lot of low-hanging fruit items where by just making a few IT changes, we can really automate a number of areas that are not as automated as we'd like them to be. And I guess we're like every other insurance company that way. But, you know, we're feeling that we need to act now because of the growth. It's... It's been exciting.

Are you thinking about upgrading your policy management system also?

I don't think, well, you know what, that gets me into guidance, so I think I better. Sorry.

Yeah, I better. We'll take that off the table, man. Okay. That's very helpful. Thanks, guys. Great. Thanks, Adam.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Andy O'Brien for closing remarks.

Thank you. Our program partners and our TREON team performed exceptionally well during this really difficult past year, and so my thanks to them for their commitment and effort. We enjoyed strong growth and were optimistic about our future. Our loss ratios were stable. were executed on our proven historic plan. We thank you for your interest and support. Thank you.

This concludes today's program. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.